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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Van Ness Plastic Molding Co., Inc. [Notices] [06/29/1998]

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Proposed Exemptions; Van Ness Plastic Molding Co., Inc. [06/29/1998]

[PDF Version]

Volume 63, Number 124, Page 35281-35291

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10483, et al.]

 
Proposed Exemptions; Van Ness Plastic Molding Co., Inc.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
requests for a hearing should state: (1) The name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing.

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No. ________, stated in each Notice of 
Proposed Exemption. The applications for exemption and the comments 
received will be available for public inspection in the Public 
Documents Room of Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-5507, 200 Constitution Avenue, NW., 
Washington, DC 20210.

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of 
the Secretary of the Treasury to issue exemptions of the type requested 
to the Secretary of Labor. Therefore, these notices of proposed 
exemption are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

Van Ness Plastic Molding Co., Inc. Employees' Money Purchase Pension 
Plan (the Plan) Located in Belleville, NJ

[Application No. D-10483]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) the Code 
and in accordance with the procedures set forth in 29 CFR part 2570, 
subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption is 
granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to (1) the making to the Plan of a restoration 
payment (the Restoration Payment) with respect to certain defaulted 
third-party notes (Note 1, Note 2 and Note 3; collectively, the Notes) 
by the Van Ness Plastic Molding Co., Inc. (the Employer), a party in 
interest with respect to the Plan; and (2) the potential future receipt 
by the Employer of recapture payments (the

[[Page 35282]]

Recapture Payments) made to the Plan pursuant to bankruptcy proceedings 
involving the issuer/assignor of the Notes.
    This proposed exemption is subject to the following conditions:
    (a) Mr. William Van Ness, the Plan trustee (the Trustee), agrees to 
have excluded from his individual account in the Plan (the Account) any 
benefit attributable to the Restoration Payment, such that the total 
Restoration Payment is allocated to the Accounts of the other Plan 
participants and does not include any portion related to the interest 
of Mr. Van Ness's Account in the Notes.
    (b) The Restoration Payment, which is calculated based upon the 
Account balances in the Plan of participants other than Mr. Van Ness, 
covers--
    (1) The aggregate unrecovered principal of the Notes plus accrued, 
but unpaid, interest on the Notes as of the dates of default, 
calculated through December 31, 1997;
    (2) An additional amount representing interest on the unrecovered 
principal of Notes 2 and 3, originally scheduled for maturity in 1999, 
from January 1998 until the date the Restoration Payment is made; and
    (3) Lost opportunity costs associated with Note 1, which was 
originally scheduled for maturity in 1997, from January 1998 until the 
date the Restoration Payment is made.
    (c) Any Recapture Payments are restricted solely to the amounts, if 
any, recovered by the Plan with respect to the Notes in litigation or 
otherwise.
    (d) The Restoration Payment is made to resolve potential claims for 
breach of fiduciary duty relating to the management of the Plan.
    (e) The Employer receives a favorable ruling from the Internal 
Revenue Service (the Service) that the Restoration Payment does not 
constitute a ``contribution'' or other payment that will disqualify the 
Plan.

Summary of Facts and Representations

    1. The Plan is a nonstandardized prototype money purchase pension 
plan having 96 participants and total assets of $1,831,873.27 as of 
December 31, 1997. The Plan is sponsored by the Employer, a New Jersey 
corporation that is engaged in the manufacture of plastic molding. Mr. 
William Van Ness, the Trustee, also serves as the sole shareholder and 
president of the Employer. As Trustee, Mr. Van Ness has full investment 
discretion and authority with regard to Plan investments except with 
respect to those that are under the control of an investment manager.
    2. Among the assets of the Plan are three notes that were issued or 
assigned by The Bennett Funding Group, Inc. (Bennett), an unrelated 
party. The Notes, which were acquired by the Plan between 1993 and 1995 
at the direction of Mr. Van Ness, are in the face amounts of $250,000 
(Note 1), $17,688.48 (Note 2), and $13,842.22 (Note 3). In order to 
purchase the Notes, the Plan paid Bennett an aggregate cash purchase 
price of $281,530.70. Following acquisition, the Plan did not incur any 
servicing fees or costs in connection with the administration of the 
Notes.
    The Notes are further described as follows:
    (a) Note 1 represented a contractual or an insurable interest in a 
pooled investment vehicle that was established and sold by Bennett and 
its subsidiary, Resort Funding, Inc., on a non-recourse basis to 
accredited investors. The investment pool consisted of consumer sales 
agreements, leases and rental agreements, installment sales contracts 
or consumer sales agreements generated by third party business 
equipment dealers and others. The amount of the issue was $60 million. 
Each unit or interest had a minimum purchase price of $10,000. The term 
of each investment contract or ``note'' ranged from 11 months to 60 
months and carried interest at the rate of approximately 6 percent to 9 
percent per annum.
    On March 15, 1993, the Plan acquired Note 1 from Bennett for the 
cash purchase price of $250,000. Note 1, which carried interest at the 
rate of 9 percent per annum, was scheduled to mature on December 15, 
1997. Interest under Note 1 was payable to the Plan in monthly 
installments of $1,875, with payments commencing on April 15, 1993.
    (b) Note 2 was acquired by the Plan from Bennett on August 1, 1995 
for a total purchase price of $17,688.48. Note 2 had a term commencing 
on September 30, 1995 and ending on August 30, 1999. It carried 
interest at the annualized rate of 9.5 percent. Principal and interest 
were payable to the Plan in monthly installments of $444.39.
    (c) Note 3 was acquired by the Plan from Bennett on November 16, 
1995 for a total purchase price of $13,842.22. Note 3 had a term 
commencing from January 15, 1996 until December 15, 1999. It carried 
interest at the annualized rate of 9.5 percent. Principal and interest 
were payable to the Plan in monthly installments of $337.76.
    Each Note was secured by (a) equipment owned by Bennett which 
Bennett was leasing to unrelated parties; and (b) an assignment of the 
income stream generated by such leases.<SUP>1</SUP> The Employer and 
the Trustee believed that the Notes were relatively low-risk and safe 
investments.
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    \1\ According to the applicant, the question of whether the 
Notes were also secured by a master insurance policy issued by 
Generali Underwriters, Inc., an unrelated party, which guaranteed 
the income stream from the leases, continues to be the subject of 
litigation.
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    4. On or about March 29, 1996, Bennett filed for Chapter 11 
bankruptcy protection in the United States Bankruptcy Court for the 
Northern District of New York (Case Nos. 96-61376 et seq.). Richard C. 
Breeden, formerly the Chairman of the Securities and Exchange 
Commission (the SEC), was appointed Bankruptcy Trustee for the Bennett 
debtors on April 18, 1996. Subsequent to the March 29, 1996 filing, 
five additional affiliates of Bennett filed for Chapter 11 protection 
and Mr. Breeden was again appointed as Bankruptcy Trustee for these 
entities.
    5. The Declaration of Bankruptcy by the Bennett debtors stemmed 
from a lawsuit by the SEC regarding alleged widespread fraudulent 
practices involving the Bennett debtors. In this regard, (a) over $55 
million of fictitious leases were sold to investors and the funds 
derived from investors were used to service these leases; (b) 
assignments made of government leases were typically illegal and 
ineffective; and (c) through certain ``sham'' transactions Bennett 
appeared to be profitable while it was actually losing money.
    6. The Plan filed a Proof of Claim (the Claim) in the amount of 
$326,355.73 for the ``money loaned and purchase of lease/assignments'' 
in the Bennett bankruptcy.<SUP>2</SUP> The Plan's Claim was classified 
as an unsecured nonpriority claim, since Mr. Breeden noted that there 
was no collateral or lien on the property of the debtor securing the 
Claim. The Claim includes both principal and interest payments on the 
Notes' outstanding balances from the date of the last payment received 
in 1996 through December 15, 1997. In this regard, the Plan received 
aggregate payments from Bennett with respect to the Notes of 
$70,396.67. Such payments can be broken down as follows:
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    \2\ The Department expresses no opinion herein on whether the 
acquisition and holding of the Notes by the Plan violated any of the 
provisions of Part 4 of Title I of the Act.
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    (a) For Note 1, the Plan received a final interest payment from 
Bennett in March 1996 in the amount of $1,875 or total interest 
payments of $67,500.
    (b) For Note 2, the Plan received monthly interest payments from 
Bennett until February 1996 in the amount of $444.39 or a total payment 
of both principal and interest of $2,221.95.

[[Page 35283]]

    (c) For Note 3, the Plan received monthly interest payments until 
February 1996 of $337.36 or a total payment of both principal and 
interest of $674.72.
    At the time of the Bennett bankruptcy proceedings, the amount of 
unrecovered principal for Notes 1, 2 and 3 were $250,000, $15,825.81 
and $13,363.98, respectively.
    7. Because of the complexity surrounding the Bennett debtors' 
bankruptcy, it is unclear whether any recovery of the Notes will occur. 
Also, due to uncertainty about whether the Notes have actually been 
insured, the applicant believes it unlikely that any insurance company 
would pay investors' claims (including individual investors and 
retirement plans) relating to the individual leases inasmuch as the 
insured is listed as Bennett. The applicant further represents that 
whatever amount, if any, that the Plan is able to recover with respect 
to the Notes through the bankruptcy proceedings, or otherwise, it is 
likely to suffer significant losses.
    8. As stated in Representation 1, as of December 31, 1997, the 
assets of the Plan totaled $1,831,873.27. This figure reflects the fair 
market value of the Plan's assets and assumes that the Notes (plus 
accrued interest) are valued at $0. According to the applicant, the 
exact fair market value of the Notes is not ascertainable at this time 
as litigation is ongoing with respect to this matter.
    9. At present, the amount of unrecovered principal of the Notes is 
$279,189.79. In addition, the accrued interest associated with the 
Notes through the dates of default, calculated through December 31, 
1997 is $44,458.89. In order to avoid potential fiduciary claims by 
Plan participants and others relating to the Plan's investment in the 
Notes, the Employer proposes to restore the losses to the Plan by 
making a ``Restoration Payment.'' Therefore, an administrative 
exemption is requested from the Department.
    10. The Restoration Payment will consist, in part, of the aggregate 
amount of the principal loss on the Notes (i.e., $279,189.79) plus 
accrued, but unpaid, interest (i.e., $44,458.89), calculated from the 
time of default through December 31, 1997, and multiplied by 58.38 
percent, which percentage reflects the interests in the Plan of 
participants other than Mr. Van Ness, who has a 41.62 percent interest 
in the Plan. In other words, 58.38 percent of the unrecovered principal 
and interest (or $188,946.09) will be paid to the Accounts of the 
remaining Plan participants. The Restoration Payment will also include 
an additional amount representing accrued interest on the unpaid 
principal of Notes 2 and 3, for the period January 1998 until the date 
the Restoration Payment is made, again attributable to the Accounts of 
participants in the Plan other than the Account of Mr. Van Ness. 
Finally, the Restoration Payment will include the lost opportunity 
costs with respect to the unrecovered principal of Note 1 from the 
period of its scheduled maturity in December 1997 and ending with the 
date immediately preceding the date the Restoration Payment is made, 
again attributable to the Accounts of participants in the Plan other 
than the Account of Mr. Van Ness. Such opportunity costs will be based 
on the average rate of return for the Plan, excluding the Notes, for 
the years 1995 through 1997.<SUP>3</SUP>
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    \3\ The average rate of return earned by the Plan for 1995 
through 1997 is 12.54 percent. This figure does not include the 
Plan's investment in the Notes. In a letter dated September 11, 
1997, Mark Shemtob, A.S.A of Abar Pension Services, Inc., an 
independent actuarial and pension consulting firm, located in 
Livingston, New Jersey, represented that the Plan had net investment 
earnings of $198,126 in 1995 and an average account balance of 
$1,198,876, which would result in a 16.53 percent rate of return for 
1995. In 1996, Mr. Shemtob noted that the Plan had net investment 
earnings of $131,397 and an average account balance of $1,032,459, 
which would result in a 12.73 percent rate of return for that year.
    By letter dated April 29, 1998, the applicant noted that the 
Plan's rate of return for the year 1997 was 8.41 percent based upon 
a telephone communication with Mr. Shemtob. Accordingly, the average 
rate of return for the Plan for the period 1995 through 1997 is 
12.54 percent.
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    Assuming the Restoration Payment is made to the Plan on June 30, 
1998, the applicant represents that the opportunity costs associated 
with Note 1 is $18,302.13 and would be calculated as follows:
$250,000 (Unrecovered Principal of Note 1)  x  58.38% (Plan's Interest 
in Note 1)  x  12.54% (Plan's Average Rate of Return for 1995-1997) = 
$18,302.13.
    Again assuming the Restoration Payment is made to the Plan on June 
30, 1998, the applicant represents that the total payment would be 
approximately $208,321.87. Of this amount,
    (a) $188,946.09 would denote the Restoration Payment as of December 
31, 1997, which would be calculated as follows:

$250,000.00.  Note 1 Unrecovered Principal                              
15,825.81...  Note 2 Unrecovered Principal                              
13,363.98...  Note 3 Unrecovered Principal                              
-------------                                                           
$279,189.79.  Total Unrecovered Principal                               
$44,458.89..  Accrued interest on Notes from Default through  12/31/97  
$323,648.68.  Total Unrecovered Principal and Accrued Interest through  
               12/31/97                                                 
$323,648.68  x  58.38% (Plan's Interest in Notes 1, 2 and 3 plus Accrued
 Interest) = $188,946.09;                                               
                                                                        

    (b) $18,302.13 would be attributed to the opportunity costs 
associated with Note 1 from January 1998 through June 30, 1998, as 
already calculated above;
    (c) $438.86 would be attributed to actual interest accruing on Note 
2 from January 1998 through June 30, 1998, calculated as follows: 
$15,825.81 (Note 2 Unrecovered Principal)  x  58.38% (Plan's Interest 
in Note 2)  x  4.75% (\1/2\ year interest) = $438.86; and
    (d) $634.79 would represent the additional interest accruing on 
Note 3 from January 1998 until June 30, 1998, calculated as follows: 
$13,363.98 (Note 3 Unrecovered Principal)  x  58.38% (Plan's Interest 
in Note 3)  x  4.75% (\1/2\ year interest) = $634.79.
    11. Because Mr. Van Ness has agreed to have excluded from his 
Account any benefit which may be attributable to the Restoration 
Payment, each affected Plan participant will have allocated to his or 
her Account in the Plan the applicable portion of the Restoration 
Payment as determined by the third-party Plan administrator. However, 
in no event will a restored Account have assets exceeding the amount 
that would have been in the Account of the affected Plan participant 
but for the loss due to the Bennett bankruptcy.
    The Plan will be required to refund the Restoration Payment to the 
Employer only to the extent of any amount or amounts that the Plan is 
able to recover from Bennett (the Recapture Payment). The Employer will 
bear all expenses of prosecuting the Plan's claims with respect to the 
Notes, including those relating to the Bennett bankruptcy proceedings, 
as well as the costs of the exemption application.
    12. Coincident with its filing of the exemption application, the 
Employer requested a Private Letter Ruling from the Service on the 
issues of whether the Restoration Payment (a) would constitute a 
``contribution'' or other payment to the Plan subject to the provisions 
of either sections 404 or 4972 of the Code; (b) would adversely affect 
the qualified status of the Plan pursuant to either Code sections 
401(a)(4) or 415; (c) would result in taxable income to affected Plan 
participants and beneficiaries; and (d) would be deductible in full by 
the Employer pursuant to section 162 of the Code.<SUP>4</SUP> In

[[Page 35284]]

its ruling letter of March 2, 1998, the Service stated that neither the 
Code nor the Income Tax Regulations provide guidance on whether the 
Employer's proposed Restoration Payment would constitute a contribution 
under the Code. However, in the instant case, the Service noted that 
the Restoration Payment would ensure that the affected participants 
would recover their Account balances and place such participants in the 
position in which they would have been in the absence of the Trustee's 
decision to invest a portion of the Plan's assets in the Notes.
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    \4\ Section 401(a)(4) of the Code provides that contributions 
made by an employer to or under a stock bonus, pension, profit 
sharing or annuity plan shall be deductible under section 404 
subject to certain limitations contained therein.
    Section 415 of the Code provides, in relevant part, that a trust 
which is part of a pension, profit sharing or stock bonus plan shall 
not constitute a qualified trust under section 401(a)--
    (A) in the case of a defined benefit plan, the plan provides for 
the payment of benefits with respect to a participant which exceeds 
the limitations of subsection (b), or
    (B) in the case of a defined contribution plan, contributions 
and other additions under the plan with respect to any participant 
for any taxable year exceed the limitations of subsection (c).
    Section 415(e) of the Code provides limitations on employer 
contributions and benefits where an individual is a participant in 
both a defined benefit and a defined contribution plan maintained by 
the same employer.
    Section 1.415-6(b)(2) of the Income Tax Regulations provides 
that the term ``annual additions'' includes employer contributions 
which are made under the plan. Section 1.415-6(b)(2) further 
provides that the Commissioner of the Service may treat transactions 
between the plan and the employer or certain allocations to 
participants' accounts as giving rise to annual additions.
    Section 4972 of the Code imposes on an employer an excise tax on 
nondeductible contributions to a qualified plan.
    Finally, section 402(a) of the Code generally provides that 
amounts held in a trust that is exempt from tax under Code section 
501(a) and that is part of a plan that meets the qualification 
requirements of Code section 401(a) will not be taxable to 
participants until such time as such amounts are actually 
distributed to distributees under the plan.
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    The Service explained that it was reasonable to characterize the 
Restoration Payment as a ``replacement payment.'' In this regard, the 
replacement payment would be made by the Employer in response to 
potential claims against the Employer and those individuals who were 
responsible for investing the Plan's assets in the Notes. In addition, 
the replacement payment would be allocated to the Accounts of 
participants in the Plan who had incurred a principal loss as a result 
of the Note investment. Thus, the Service concluded that the proposed 
Restoration Payment (a) would not constitute a contribution or other 
payment subject to the provisions of Code sections 404 or 4972; (b) 
would not adversely affect the qualified status of the Plan pursuant to 
either Code section 401(a)(4) or Code section 415; and (c) would not, 
when made, result in taxable income to affected Plan participants and 
beneficiaries.
    Finally, the ruling letter is conditioned on two requirements. 
Firstly, the Restoration Payment must be made to resolve potential 
claims for breach of fiduciary duty relating to the management of the 
Plan. Secondly, the ruling letter is based on the representation that 
no part of the Restoration Payment will be added to the Account of the 
Trustee.
    13. In summary, it is represented that the proposed transactions 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because: (a) The Restoration Payment will enable the 
Plan to recover immediately the unpaid principal of the Notes, accrued 
interest and lost opportunity costs; (b) any Recapture Payments will be 
restricted solely to the amounts, if any, recovered by the Plan with 
respect to the Notes in litigation or otherwise; (c) the Employer has 
received a favorable ruling from the Service that the Restoration 
Payment does not constitute a ``contribution'' or other payment that 
will disqualify the Plan; (d) Mr. Van Ness's Account will not share in 
the Restoration Payment such that the total Restoration Payment will be 
made to the Accounts of Plan participants other than Mr. Van Ness; and 
(e) the Restoration Payment will be made to resolve potential claims 
for breach of fiduciary duty relating to the management of the Plan.
    For Further Information Contact: Ms. Jan D. Broady of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

John Hancock Mutual Life Insurance Company (JHMLIC) Located in Boston, 
Massachusetts

[Application No. D-10484]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR part 
2570 subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of section 406(b)(2) of the Act shall not 
apply to:
    (1) The proposed purchases and sales of timber properties between 
various separate accounts (the Accounts), such as the ForesTree 
Separate Account, that are maintained by JHMLIC and managed by Hancock 
Natural Resource Group, Inc. (HNRG), John Hancock Timber Resource 
Corporation (JHTRC), or another Affiliate of JHMLIC; and
    (2) The proposed purchases and sales of timber properties between 
the Accounts where HNRG or another Affiliate of JHMLIC serves as the 
investment manager and various partnerships (the Partnerships) in which 
JHTRC or another Affiliate of JHMLIC is the general partner.
Conditions and Definitions
    This proposed exemption is subject to the following conditions:
    1. ERISA-Covered Plans may participate in the proposed transactions 
only if they have total assets in excess of $100 million.
    2. At least 30 days prior to the proposed transaction, each 
affected Customer invested in the Accounts or Partnerships 
participating in the transaction will be provided with information 
regarding the timber properties involved and the terms of the 
transaction, including the purchase price and how the transaction would 
meet the goals and investment policies of the Customer. Notice of any 
change in the purchase price will be provided to the Customer at least 
30 days prior to the consummation of the transaction.
    3. An Independent Fiduciary will be appointed by JHMLIC or an 
Affiliate to represent the interests of the ERISA-Covered Plans as 
follows:
    (a) Where the proposed transaction involves an ERISA-Covered Plan 
(including a Pooled Separate Account or Partnership holding ``plan 
assets'' subject to the Act) <SUP>5</SUP> and a Non-ERISA Plan or other 
Non-ERISA Customer, an Independent Fiduciary will be appointed to 
represent the ERISA-Covered Plan (or Pooled Separate Account or 
Partnership), whether that Account or Partnership is the buyer or the 
seller of a timber property in the proposed transaction;
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    \5\ See 29 CFR 2510.3-101 for the Department's definition of 
``plan assets'' relating to plan investments.
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    (b) Where the proposed transaction involves two ERISA-Covered Plans 
(or Pooled Separate Accounts or Partnerships holding ``plan assets'' 
subject to the Act) and the decision to liquidate the timber property 
is the result of one or more ``triggering events'' described below, an 
Independent Fiduciary will be appointed by JHMLIC or an Affiliate to 
represent the purchasing plan (or Pooled Separate Account or 
Partnership)--i.e. the Buying Account or Buying Partnership. A 
``triggering event'' will exist whenever:
    (i) JHMLIC or an Affiliate receives a direction from the Customer 
to liquidate

[[Page 35285]]

all of the Customer's Account or interest in a Partnership;
    (ii) JHMLIC or an Affiliate receives a request by the Customer to 
liquidate a specified timber property; or
    (iii) A liquidation of all of the assets held in the Selling 
Account or Selling Partnership, or a particular property held by such 
Account or Partnership, is required under the terms of the investment 
contract, insurance contract or investment guidelines governing the 
Account or Partnership, and the decision to select any particular 
timber property to be sold is outside of the control of JHMLIC and its 
Affiliates; and
    (c) Where the proposed transaction involves two ERISA-Covered Plans 
(or Pooled Separate Accounts or Partnerships holding ``plan assets'' 
subject to the Act) and there is no ``triggering event'' as described 
above in Condition 3(b), an Independent Fiduciary will be appointed by 
JHMLIC or an Affiliate for each Account or Partnership involved in the 
transaction.
    4. With respect to each transaction requiring the participation of 
an Independent Fiduciary (as described in Condition 3 above), the 
purchase and sale of a timber property shall not be consummated unless 
the Independent Fiduciary determines that the transaction, including 
the price to be paid or received for the property, would be in the best 
interest of the particular Account or Partnership involved based on the 
investment policies and objectives of such Account or Partnership.
    5. Each Account or Partnership which buys or sells a particular 
timber property pays no more than or receives no less than the fair 
market value of the timber property at the time of the transaction, as 
determined by a qualified independent real estate appraiser experienced 
with the valuation of timber properties similar to the type involved in 
the transaction.
    6. Each purchase or sale of a timber property between the Accounts 
or Partnerships is a one-time transaction for cash.
    7. Each Account or Partnership involved in the purchase or sale of 
a timber property pays no real estate commissions or brokerage fees 
relating to the transaction.
    8. JHMLIC or an Affiliate acts as a discretionary investment 
manager for the assets of the Accounts or Partnerships involved in each 
transaction.
    9. No purchase or sale transaction is designed to benefit the 
interests of one particular Account or Partnership over another.
    10. For purposes of this proposed exemption:
    (a) ``Account'' means a Separate Account as defined below, 
including a ``Non-Pooled Separate Account'' or a ``Pooled Separate 
Account'';
    (b) ``Partnership'' means a limited partnership with assets, that 
may or may not be considered ``plan assets'' subject to the Act, for 
which JHTRC or another Affiliate of JHMLIC is the general partner and 
HNRG or another Affiliate of JHMLIC serves as investment manager;
    (c) ``ERISA-Covered Plan'' is an employee benefit plan as defined 
under section 3(3) of the Act;
    (d) ``Non-ERISA Plan'' or ``Non-ERISA Customer'' means an entity or 
investor not covered by the provisions of Title I of the Act, such as a 
governmental plan, a university endowment fund, a charitable foundation 
fund or other institutional investor, whose assets are managed in an 
Account or Partnership for which JHMLIC or an Affiliate acts as 
investment manager;
    (e) ``Affiliate'' means any person directly or indirectly through 
one or more intermediaries, controlling, controlled by, or under common 
control with JHMLIC;
    (f) ``Buying Account'' or ``Buying Partnership'' means the Account 
or Partnership which seeks to purchase timber properties from another 
Account or Partnership;
    (g) ``Selling Account'' or ``Selling Partnership'' means the 
Account or Partnership which seeks to sell timber properties to another 
Account or Partnership;
    (h) ``Independent Fiduciary'' means a person or entity with 
authority to both review the appropriateness of the proposed 
transaction for an Account or Partnership, that is considered to hold 
``plan assets'' subject to the fiduciary responsibility provisions of 
the Act, based on the investment policy established for that Account or 
Partnership, and to negotiate the terms of the transaction, including 
the price to be paid for the timber property. An individual or firm 
selected to serve as an Independent Fiduciary shall meet the following 
criteria:
    (1) The individual or firm may have no current employment 
relationship with John Hancock or an Affiliate, although a prior 
employment relationship would not disqualify the individual or firm;
    (2) The individual or firm must not have received more than five 
(5) percent of its annual gross receipts during the preceding calendar 
year from business with John Hancock and its Affiliates;
    (3) The individual or individuals in the firm must have an 
undergraduate or graduate academic degree in forestry;
    (4) The individual or individuals in the firm must have a minimum 
of five (5) years experience and a demonstrated proficiency in 
timberland appraisal work;
    (5) The individual or individuals in the firm must have a current 
certification as a Member of the Appraisal Institute, a Senior Real 
Estate Analyst under the Society of Real Estate Appraisers, or a 
similar nationally recognized certification;
    (6) The individual or firm must have the ability to access 
appropriate timberland sales comparison data and make appropriate 
adjustments to the subject property; and
    (7) The individual or firm must not have a criminal record 
involving fraud, fiduciary standards, or securities laws violations;
    (i) ``Separate Account'' means a segregated asset Account which 
receives premiums or contributions from customers, including employee 
benefit plans subject to the Act, in connection with group annuity 
contracts and funding agreements, with investments held in the name of 
JHMLIC, but where the value of the contract or agreement to the 
Customer (contractholder) fluctuates with the value of the investment 
associated with such Account;
    (j) ``Non-Pooled Separate Account'' or ``Non-Pooled Account'' means 
a Separate Account established to back a single contract issued to one 
Customer, which may be an employee benefit plan subject to the Act;
    (k) ``Pooled Separate Account'' or ``Pooled Account'' means a 
Separate Account established to back a group of substantially identical 
contracts issued to a number of unrelated Customers, including employee 
benefits plans subject to the Act; and
    (l) ``Customer'' means a person or entity that acts as the 
authorized representative for an Account or Partnership involved in a 
proposed purchase or sale of timber properties, that is independent of 
JHMLIC and its Affiliates.

Summary of Facts and Representations

    1. The Applicants. The applicant for the exemption is John Hancock 
Mutual Life Insurance Company of Massachusetts (JHMLIC or ``John 
Hancock'') on behalf of itself and on behalf of its indirect wholly-
owned subsidiaries, Hancock Natural Resource Group, Inc. (HNRG) and 
John Hancock Timber Resource Corporation (JHTRC), both Delaware 
corporations.

[[Page 35286]]

    John Hancock ranks as one of the largest insurance companies in the 
United States and is a registered investment advisor. John Hancock and 
its subsidiaries had total assets of approximately $58.6 billion as of 
December 31, 1996, and assets under management of approximately $107 
billion as of that date.
    John Hancock offers group annuity contracts and funding agreements 
to Customers, including employee benefit plans subject to the Act. 
Certain of these contracts and agreements provide that, in accordance 
with contractholder direction, the premiums or contributions received 
from the contractholder will be allocated internally on the books of 
John Hancock to segregated asset accounts or ``Separate Accounts.'' The 
Separate Account investments are held in John Hancock's name, but the 
value of the contract or agreement to the contractholder fluctuates 
with the value of the investments associated with the Separate Account. 
The direct expenses of managing the investments and John Hancock's fees 
are charged against the value of the Separate Account.
    Separate Accounts may be established to back a single contract 
issued to one customer (a ``Non-Pooled Separate Account''). In 
addition, a Separate Account may be established to back a group of 
substantially identical contracts issued to a number of unrelated 
customers (a ``Pooled Separate Account'').
    2. John Hancock currently maintains a number of Separate Accounts 
that invest almost exclusively in timberland. These Pooled and Non-
Pooled Separate Accounts are known as the ForesTree Separate Accounts. 
The contractholders of both the pooled and non-pooled ForesTree 
Separate Accounts include both ERISA-covered plans and non-ERISA 
governmental plans. As of July 1997, John Hancock had established a 
total of 14 such pooled and non-pooled ForesTree Separate Accounts in 
which 32 contractholders participate. Currently, over two million acres 
of timberland are allocated to the ForesTree Separate Accounts, and 
these properties have a fair market value in excess of $2.3 billion.
    Under the applicable contract or agreement, John Hancock has the 
right to control, manage and administer each Separate Account, 
including the sole discretion to select and dispose of investments in 
accordance with the investment policy established for the Account.
    3. John Hancock's management responsibilities under the ForesTree 
Separate Accounts are performed mostly by its wholly-owned subsidiary, 
HNRG, which was established in 1995. Prior to its incorporation in 
1995, HNRG functioned as a division within John Hancock. HNRG currently 
manages 2.5 million acres of timberland valued at approximately $2.87 
billion. HNRG's managed assets include assets held in the ForesTree 
Separate Accounts as well as assets managed through other arrangements. 
HNRG is responsible for all decisions regarding the acquisition and 
disposition of timberland properties held in the ForesTree Separate 
Accounts, although such decisions must be reviewed and approved by John 
Hancock's internal investment committees. HNRG also has sole 
responsibility for the management of John Hancock's timberland 
properties, including site preparation and reforestation, road building 
and construction, maintenance, acquisition of insurance and payment of 
taxes. On-site work is performed by independent forest managers under 
contract to HNRG.
    4. Assets invested in the ForesTree Separate Accounts are managed 
by John Hancock and HNRG in accordance with the investment policies 
established for the Accounts. The investment policy for each Non-Pooled 
Account is established jointly by John Hancock and the contractholder. 
For each of the Pooled Accounts, the investment policy is established 
by John Hancock and adopted by each contractholder when it chooses to 
participate in a Pooled Account. Under the investment policy of most of 
the ForesTree Separate Accounts, timberland properties are purchased or 
sold opportunistically to favor the return of the particular portfolio. 
However, John Hancock states that as a practical matter the properties 
allocated to the ForesTree Separate Accounts are fairly illiquid 
investments, and are considered by its customers to be long-term 
investments.
    HNRG has established certain guidelines that are followed as 
investments are acquired and allocated to timberland portfolios it 
manages, including those portfolios for Accounts holding ``plan 
assets'' subject to the Act such as the ForesTree Separate Accounts. 
The goal of these guidelines is to enable HNRG to provide its clients 
with access to a variety of timberland acquisitions through a fair, 
consistent and unbiased process. The central element of the procedure 
is a determination of the suitability of an investment for a portfolio. 
In the event that an investment is suitable for more than one 
portfolio, priorities are set in accordance with an investment queue 
procedure.
    HNRG states that the first step in determining portfolio 
suitability is to identify all potential funding sources for a pending 
acquisition among its existing clients. Each prospective participating 
Account is evaluated independently. The client's investment policy, 
setting forth specific objectives and constraints, is the primary 
determinant of whether or not a particular acquisition is suitable for 
allocation to the Account. The portfolio ``fit'' is based on financial 
analysis that projects and measures future portfolio performance, 
including and excluding the pending acquisition, against established 
performance targets. Performance targets may include total return, 
appreciation and income. Different levels of investment in the pending 
acquisition are reviewed. Consideration is given to diversification by 
geographic region, timber markets and timber species. The proposed 
investment is analyzed to determine if it can be broken into 
appropriate parcels to fit the client portfolio's needs. Portfolio 
investment recommendations are intended to be consistent with the 
standards defined by the Association for Investment Management and 
Research (AIMR), a professional association which has adopted certain 
standards for best practices by investment managers.
    The amount of funding available for any potential acquisition is 
determined after the portfolio suitability analysis has been completed. 
As a result, HNRG states that when it comes to funding an acquisition, 
one of the following three situations will exist: (i) The acquisition 
will be undersubscribed (i.e. there are not enough funds available to 
acquire the investment); (ii) the acquisition is fully subscribed (i.e. 
there are ample funds available to acquire the investment), or (iii) 
the acquisition is oversubscribed (i.e. client portfolio funding 
availability exceeds the amount needed to fund the acquisition).
    The ``investment queue'' sets the priorities for utilizing funds 
from existing client Accounts in the event an investment is suitable 
for more than one client's portfolio. The ``investment queue'' is based 
on the source of available client funds with the following order of 
priority:

    (a) Client funds committed to timber property acquisitions, but 
unallocated;
    (b) Timberland disposition proceeds designated for reinvestment;
    (c) Cash flow from operations; and
    (d) Contingent funds.

    Within each of the four categories of available funds, the length 
of time that the funds have been available for investment will 
determine the level of priority. For example, funds that have

[[Page 35287]]

been committed to an HNRG timberland investment program, but are 
unallocated, will receive priority between clients in the chronological 
order of when each commitment was established.
    5. Customers that want to use John Hancock's timber management 
expertise typically invest in the ForesTree Separate Accounts. These 
customers include both ERISA-covered plans and non-ERISA plans. 
Customers may also invest directly in Partnerships that own timber 
properties. In these cases, JHTRC is usually appointed the general 
partner of the Partnership holding the property and HNRG serves as 
investment manager of the Partnership. These management 
responsibilities are exercised in accordance with the investment 
guidelines contained in the partnership agreements, which contain 
HNRG's investment selection and allocation policy procedures (as 
described in Paragraph 4 above).
    For purposes of this proposed exemption, both ForesTree Separate 
Account contractholders and John Hancock's investment management 
clients who directly invest in Partnerships holding timber properties, 
including ERISA-Covered Plans, are referred to as ``Customers'.
The Transactions
    6. The Applicants state that occasions may arise when it is 
appropriate to liquidate timber property held in an Account or 
Partnership, even though the property remains an attractive investment. 
For example, a Customer's timber investments may have so increased in 
value from its initial investment that the timber-related portion of 
the Customer's aggregate portfolio exceeds the Customer's current asset 
allocation guidelines for that investment class. In addition, a 
Customer may request that John Hancock liquidate a portion of its 
timber portfolio in order to recognize some of the portfolio's gains, 
even though the particular timber parcel remains an attractive 
investment. John Hancock may also conclude that a particular timber 
parcel, through individually an attractive investment, is no longer 
appropriate for the Customer's Account, in light of the composition of 
the Account, its liquidity needs and other available investment 
opportunities.
    The Applicants state that in these and other situations in which 
timber parcels might be sold, the parcels chosen for liquidation could 
be appropriate investments for other Customers. Under the proposed 
exemption, John Hancock could satisfy the objectives of a Selling 
Account or Selling Partnership and a Buying Account or Buying 
Partnership in a manner that provides advantages to both sides of the 
transaction. Therefore, John Hancock requests an exemption that would 
permit it (and its Affiliates) to transfer timber parcels between its 
Customer Accounts and Partnerships under certain conditions and 
procedures described herein.
    7. If John Hancock determines that it should liquidate any 
timberland assets held in a Customer's Account or Partnership, or if as 
the result of certain ``triggering events'' described below such a 
liquidation must occur, and John Hancock concludes that a particular 
parcel of timberland to be sold is an appropriate investment for the 
portfolio of another Account or Partnership, John Hancock will engage 
independent fiduciaries (the I/Fs) to represent the interests of any 
ERISA-Covered Plans involved.
    Under the procedures described by the Applicants, an I/F will be 
appointed by JHMLIC or an Affiliate to represent the interests of the 
ERISA-Covered Plans as follows:
    (a) Where the proposed transaction involves an ERISA-Covered Plan 
(including a Pooled Separate Account or Partnership holding ``plan 
assets'' subject to the Act) and a Non-ERISA Plan or other Non-ERISA 
Customer, an I/F will be appointed to represent the ERISA-Covered Plan 
(or Pooled Separate Account or Partnership), whether that Account or 
Partnership is the buyer or the seller of a timber property in the 
proposed transaction.
    (b) Where the proposed transaction involves two ERISA-Covered Plans 
(or Pooled Separate Accounts or Partnerships holding ``plan assets'' 
subject to the Act) and the decision to liquidate the timber property 
is the result of one or more ``triggering events'' described below, an 
I/F will be appointed by JHMLIC or an Affiliate to represent the 
purchasing plan (or Pooled Separate Account or Partnership)--i.e. the 
Buying Account or Buying Partnership. A ``triggering event'' will exist 
whenever:
    (i) JHMLIC or an Affiliate receives a direction from the Customer 
to liquidate all of the Customer's Account or interest in a 
Partnership;
    (ii) JHMLIC or an Affiliate receives a request by the Customer to 
liquidate a specified timber property; or
    (iii) A liquidation of all of the assets held in the Selling 
Account or Selling Partnership, or a particular timber property held by 
such Account or Partnership, is required under the terms of the 
investment contract, insurance contract or investment guidelines 
governing the Account or Partnership, and the decision to select any 
particular property to be sold is outside the control of JHMLIC and its 
Affiliates.
    (c) Where the proposed transaction involves two ERISA-Covered Plans 
(or Pooled Separate Accounts or Partnerships holding ``plan assets'' 
subject to the Act) and there is no ``triggering event'', an I/F will 
be appointed by JHMLIC or an Affiliate for each Account or Partnership 
involved in the transaction.
    With respect to each transaction requiring the participation of an 
I/F, the purchase and sale of a timber property shall not be 
consummated unless the I/F determines that the transaction, including 
the price to be paid or received for the property, would be in the best 
interest of the particular Account or Partnership involved based on the 
investment policies and objectives of such Account or Partnership. The 
I/F will have the authority both to review the appropriateness of the 
proposed purchase or sale in light of the Customer's investment policy 
and to negotiate the terms of the transaction, including the price to 
be paid for the property and the allocation of the transaction cost 
savings to the buyer and seller.<SUP>6</SUP> The I/F will always be 
provided with a recent appraisal of the timber property obtained by 
HNRG from a qualified independent real estate appraiser experienced 
with the valuation of timber properties similar to the type involved in 
the transaction. Under the conditions of this proposed exemption, each 
Account or Partnership which buys or sells a particular timber property 
must pay no more than or receive no less than the fair market value of 
the timber property at the time of the transaction, as determined by an 
independent qualified real estate appraiser.
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    \6\ The Applicants state that generally all of the transaction 
expenses for the buyer and the seller would be saved. However, to 
the extent that there are any expenses that cannot be avoided, such 
expenses would be negotiated between the independent fiduciary and 
John Hancock, or a second independent fiduciary, as the case may be.
---------------------------------------------------------------------------

    8. An individual or firm selected to serve as an I/F would be 
required to meet the following criteria:
    (a) The individual or firm may have no current employment 
relationship with John Hancock or an Affiliate, although a prior 
employment relationship would not disqualify the individual or firm;
    (b) The individual or firm must not have received more than five 
(5) percent of its annual gross receipts during the preceding calendar 
year from business with John Hancock and its Affiliates;

[[Page 35288]]

    (c) The individual or individuals in the firm must have an 
undergraduate or graduate academic degree in forestry;
    (d) The individual or individuals in the firm must have a minimum 
of five (5) years experience and a demonstrated proficiency in 
timberland appraisal work;
    (e) The individual or individuals in the firm must have a current 
certification as a Member of the Appraisal Institute, a Senior Real 
Estate Analyst under the Society of Real Estate Appraisers, or a 
similar nationally recognized certification;
    (f) The individual or firm must have the ability to access 
appropriate timberland sales comparison data and make appropriate 
adjustments to the subject property; and
    (g) The individual or firm must not have a criminal record 
involving fraud, fiduciary standards, or securities laws violations.
    In addition to the appointment of an I/F, the Applicants state that 
at least 30 days prior to any transaction, each affected Customer 
involved with the Accounts or Partnerships participating in the 
transaction will be provided with information regarding the timber 
properties involved and the terms of the transaction, including the 
purchase price and how the transaction would meet the goals and 
investment policies of the Customer. John Hancock will provide an 
additional notice to Customers should the price of a timber property 
change following the initial notice. The transaction will not be 
consummated until 30 days after the second notice has been provided.
    Any Customer that is an ERISA-Covered Plan will be responsible for 
monitoring the performance of John Hancock and its Affiliates as well 
as the I/F, when an I/F is required, to ensure that the conditions of 
this proposed exemption are met. The Applicants state that all ERISA-
Covered Plans will be large plans with sophisticated fiduciaries 
capable of monitoring the performance of the parties in the proposed 
transaction. Under the conditions of this proposed exemption, ERISA-
Covered Plans may participate in the proposed transactions only if they 
have total assets in excess of $100 million.
Justification for Transactions
    9. The Applicants represent that the transfer of timber properties 
from one Account or Partnership to another will have a number of 
advantages to both the Buying Account or Partnership and the Selling 
Account or Partnership.
    First, when the transfer is between two of John Hancock's ForesTree 
Separate Accounts, it will not require the transfer of legal ownership 
of the property. John Hancock has legal title to all assets allocated 
to its Separate Accounts and may reallocate these assets among Separate 
Accounts without a change in legal title. This means that significant 
transaction costs can be avoided, including real property transfer 
taxes, title insurance policy costs, closing and recording costs and, 
where required, phase one environmental audits.<SUP>7</SUP> In 
addition, each Account or Partnership involved in the purchase or sale 
of a timber property would not pay any real estate commissions or 
brokerage fees for the transaction. The allocation of any remaining 
transaction costs would be negotiated between the buyer and the seller 
for each transaction. Under the transactions that would be covered by 
this proposed exemption, the I/Fs would be responsible for negotiating 
the allocation of any remaining transaction costs for the Accounts or 
Partnerships for which they are acting.
---------------------------------------------------------------------------

    \7\ For example, in a transaction between Lyons Falls Pulp & 
Paper, Inc., as seller, and a JHMLIC Non-Pooled Separate Account, as 
buyer, which involved 67,430 acres of timberland that was sold to 
the Account for approximately $12.1 million on February 14, 1996, 
the total transaction costs involved more than 7.15 percent of the 
acquisition price or over $865,150 ($12,100,000  x  .0715). This 
figure excludes the New York State Gains Tax of over $1,000,000 that 
was incurred by the seller.
---------------------------------------------------------------------------

    Second, a transfer of timber properties between the Accounts or 
Partnerships will often allow a Buying Account or Partnership to invest 
its assets more quickly and in properties that might not otherwise be 
available to them. John Hancock believes that investors commit to 
establishing a timberland investment portfolio because they have 
identified a current need for such an asset category. Therefore, John 
Hancock states that once a Customer has committed to a ForesTree 
Separate Account or to a Partnership, it is important to the Customer 
to invest its funds as rapidly as is prudent. However, attractive 
timber properties are relatively scarce, and allowing a transfer of 
timber parcels in accordance with this proposed exemption would provide 
an opportunity for the purchasing Customers to invest funds more 
rapidly than would be possible if the purchase involved a seller having 
no relationship to John Hancock.
    Third, the Applicants represent that because HNRG is the manager of 
the Selling Account's or Partnership's timber property, much more 
information about the property would be available to a Buying Account 
or Partnership than would be if the property were not managed by HNRG. 
John Hancock states that this situation reduces the risk to its 
purchasing Customers. In addition, because HNRG is already familiar 
with the timber property, the Buying Account or Partnership would avoid 
certain expenses normally associated with the purchase of a new 
property. These ``start-up'' expenses include the costs of lot 
management plan development, aerial photographs and geographical 
information systems (GIS) mapping.
    Finally, each purchase and sale of a timber property between the 
Accounts and/or Partnerships will be a one-time transaction for cash. 
No purchase or sale transaction will be designed to benefit the 
interests one particular Account or Partnership over another.
    10. In summary, John Hancock represents that the proposed 
transactions will meet the statutory criteria of section 408(a) of the 
Act because: (a) Each purchase or sale of a timber property between the 
Accounts or Partnerships will be a one-time transaction for cash; (b) 
each affected Customer involved with the Accounts or Partnerships 
participating in the transaction will be provided with information, at 
least 30 days prior to the proposed transaction, regarding the timber 
properties involved and the terms of the transaction, including the 
purchase price and how the transaction would meet the goals and 
investment policies of the Customer; (c) an I/F will be appointed by 
JHMLIC or an Affiliate to represent the interests of the ERISA-Covered 
Plans in the proposed transaction, unless the decision to liquidate a 
timber property from a Selling Account or Selling Partnership is the 
result of one or more ``triggering events'; (d) in a transaction where 
an I/F is involved, the purchase or sale of the timber property shall 
not be consummated unless the I/F determines that the transaction, 
including the price to be paid or received for the property, would be 
in the best interest of the particular Account or Partnership involved 
based on the investment policies and objectives of such Account or 
Partnership; (e) each Account or Partnership which buys or sells a 
particular timber property will pay no more than or will receive no 
less than the fair market value of the timber property at the time of 
the transaction, as determined by an independent qualified real estate 
appraiser; (f) each Account or Partnership involved in the purchase or 
sale of a timber property will pay no real estate commissions or 
brokerage fees relating to the transaction; (g) no purchase or sale 
transaction will be designed to benefit the interests one particular 
Account or

[[Page 35289]]

Partnership over another; and (h) ERISA-Covered Plans will be able to 
participate in the proposed transactions only if they have total assets 
in excess of $100 million.
    FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the 
Department, telephone (202) 219-8194. (This is not a toll-free number.)

ACRA Local 725 Health & Welfare Fund (the Welfare Plan) and ACRA Local 
725 Pension Fund (the Pension Plan; together, the Plans) Located in 
Macon, Georgia

[Application Nos. L-10536 and D-10537]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and in accordance with the 
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the restrictions 
of section 406(b)(2) of the Act shall not apply to the proposed payment 
of interest by the Pension Plan to the Welfare Plan on past mistaken 
contributions (the Mistaken Contributions) pursuant to an 
indemnification agreement by the Board of Trustees of the Pension Plan 
with respect to the Mistaken Contributions, provided the following 
conditions are satisfied: (a) The Mistaken Contributions occurred as a 
result of an inadvertent clerical error committed by the Plans' 
independent third party administrator; (b) the principal amount of the 
Mistaken Contributions was repaid as soon as the error was discovered; 
and (c) the amount of interest to be paid to the Welfare Plan by the 
Pension Plan has been determined by a third party bank to be the fair 
market rate of interest.

Summary of Facts and Representations

    1. The Welfare Plan is the ACRA Local 725 Health & Welfare Fund of 
Dade, Broward and Monroe Counties, Florida, and the Pension Plan is the 
ACRA Local 725 Pension Fund of Dade, Broward and Monroe Counties, 
Florida. Each Plan is maintained pursuant to Collective Bargaining 
Agreements between Air Conditioning Refrigeration Associates, an 
employer association representing various employers (the Employers), 
and United Association Local Union Number 725 (the Union), an employee 
organization whose members are covered by the Plan. The Union 
represents individuals who perform, as employees of the Employers, 
construction and service work in the air conditioning and pipe trades.
    The Welfare Plan provides health and welfare benefits to 
participant employees and their families. It is funded solely by 
Employer contributions and earnings thereon. The Welfare Plan has been 
in existence since 1961. As of April 30, 1997, the Welfare Plan had 674 
participants, and approximately $4,275,000 in assets.
    The Pension Plan provides retirement and certain disability 
benefits to Plan participants and survivor benefits to spouses and/or 
other beneficiaries that may be designated by the participant in 
accordance with the Plan's procedures. The Pension Plan has been in 
existence since 1962. As of April 30, 1997 the Pension Plan had 1,633 
participants and assets of approximately $56,100,000.
    2. The Board of Trustees of each Plan, all of whom are individuals 
who serve in that capacity for both Plans, had for a period of several 
years retained the services of Consolidated Benefit Services, Inc. of 
Atlanta, Georgia (Consolidated) to serve as administrative manager (the 
Administrator) for the Plans. Employer contributions are made to the 
Pension Plan and the Welfare Plan as well as other trust funds and 
entities to which contributions are required to be paid pursuant to the 
Collective Bargaining Agreement between the Employers and the Union. 
These contributions are collected and deposited in an escrow account 
(the Escrow) under the supervision of the Administrator. The purpose of 
the Escrow is to receive and deposit Employer contributions, allow for 
clearance of checks and record each Employer contribution to the Plans 
in a timely fashion. Sums received by the Escrow are then allocated to 
the appropriate accounts. Thus, the appropriate amount of contributions 
due to the Welfare Plan are normally allocated and paid to the Welfare 
Plan accounts, and the appropriate amount of contributions due to the 
Pension Plan are normally allocated and paid to the Pension Plan 
accounts.
    3. In approximately September, 1996, the Board of Trustees of each 
Plan was advised that the parent corporation of Consolidated, 
Harrington Benefit Corporation (Harrington), which was also the parent 
corporation of American Benefit Plan Administrators, Inc. (ABPA), had 
been acquired by Health Services, Inc. (Health Services), a public 
company. After the acquisition of Harrington by Health Services, all 
administrative record-keeping for the Plans was transferred from the 
Atlanta office of Consolidated to the Dallas office of ABPA.
    4. In August 1997, the independent accountant for the Plans (the 
Auditor), in the course of conducting a routine annual audit, 
discovered that in November 1996, ABPA, as the Administrator for the 
Plans, withdrew from the Escrow and transferred to the accounts of the 
Pension Plan, sums which were in excess of the proper contributions 
allocated to the Pension Plan by the Employers. This excess payment 
created a shortfall in the proper contributions to the Welfare Plan. 
This process continued to occur in subsequent months.<SUP>8</SUP> For 
purposes of this proposed exemption, all excess amounts of money 
erroneously allocated to the Pension Plan during this period of time 
are described herein as ``the Mistaken Contributions''. The applicant 
represents that payments from the Escrow to the Pension Plan were 
utilized by ABPA to pay current disbursements by the Pension Plan, 
including such items as current pension benefits and ongoing 
operational expenses. Nonetheless, all financial reports from ABPA to 
the Trustees of each Plan erroneously reflected the proper 
contributions being allocated to the Pension Plan and the Welfare Plan. 
These erroneous financial reports, rather than documentation showing 
the actual amounts transferred to the Pension Plan, were delivered to 
the respective Boards of Trustees. Accordingly, the Boards of Trustees 
of the Plans were not aware of the fact that sums of money were being 
allocated erroneously to the Pension Plan from the Escrow. The Trustees 
were notified by the Auditor in late August, 1997. At that time, 
immediate instructions were made to correct the Mistaken Contributions.
---------------------------------------------------------------------------

    \8\ In this regard, the Department notes that section 404(a) of 
the Act requires, among other things, that a fiduciary discharge his 
duties with respect to a plan solely in the interest of the 
participants and beneficiaries and with the care, skill, prudence 
and diligence under the circumstances then prevailing that a prudent 
man acting in a like capacity and familiar with such matters would 
use in the conduct of an enterprise of a like character and with 
like aims. With respect to the actions and omissions of ABPA, the 
Department notes that no relief would be provided under the proposed 
exemption for any violation of the general fiduciary provisions of 
Part 4 of Title I of the Act.
---------------------------------------------------------------------------

    5. On October 29, 1997, all excess sums paid erroneously to the 
Pension Plan were repaid to the Welfare Plan. The period of delay 
between the time of discovery of the error (i.e., August, 1997) and its 
correction was the time required by the Auditor to accurately 
investigate and calculate the amount necessary to correct the error. 
The total amount of the Mistaken Contributions was $796,983.29. This 
amount represented approximately 18.6% of the Welfare Plan's assets and 
1.4% of the Pension Plan's assets.

[[Page 35290]]

    6. The applicants represent that since the Mistaken Contributions 
were the result of unintended erroneous allocations by the 
Administrator of contributions by the Employers, they may be considered 
to come within section 403(c)(2)(A)(ii) of the Act, which would permit 
the return of the contributions within 6 months after the plan 
administrator discovered that the contributions were made by a mistake 
of fact or law.<SUP>9</SUP> As a result, the applicants are not seeking 
an exemption for the Mistaken Contributions or the repayment of their 
principal amount. Rather, the applicants are requesting an exemption 
merely for the proposed payment of interest by the Pension Plan to the 
Welfare Plan in connection with the treatment of these transactions as 
``Mistaken Contributions'' in order to make the Welfare Plan ``whole'' 
for the Pension Plan's use of the money that was erroneously allocated 
by ABPA from the Escrow to the Pension Plan.
---------------------------------------------------------------------------

    \9\ The Department expresses no opinion in this proposed 
exemption as to whether the contributions are subject to section 
403(c)(2)(A)(ii) of the Act.
---------------------------------------------------------------------------

    7. In addition to the Pension Plan's repayment of the principal 
amount of the Mistaken Contributions to the Welfare Plan, the Board of 
Trustees of the Pension Plan now proposes to pay interest to the 
Welfare Plan pursuant to an indemnification agreement (the 
Indemnification) with the Board of Trustees of the Welfare Plan. The 
Indemnification consists of an agreement to pay a reasonable rate of 
interest on the total amount of the Mistaken Contributions to reimburse 
the Welfare Plan for lost income. The interest rate to be paid by the 
Pension Plan will be established as a fair market rate by an 
independent bank. The Liberty Bank (the Bank) in Macon, Georgia, was 
contacted for the purpose of establishing such a market rate. The Bank 
is an independent bank which has no other relationship with the Plans. 
The Bank represents that an appropriate rate for such Mistaken 
Contributions would be 8.25 to 8.5% per annum. Accordingly, the 
Trustees of both Plans have agreed to utilize the rate of 8.5% per 
annum to reimburse the Welfare Plan for losses relating to the period 
of time it was denied access to the assets (i.e., $796,983.29).
    8. The applicants represent that the Trustees of the Plans have 
repeatedly requested ABPA to provide a written explanation of the 
manner in which the Mistaken Contributions occurred, but ABPA has 
failed to provide any response. Due to dissatisfaction with ABPA's 
performance, the Trustees terminated ABPA's services effective August 
31, 1997, and appointed a new administrative manager, Core Management 
Resources, Inc., of Macon, Georgia.
    9. The applicants represent that no participant in either Plan 
experienced any reduction, deferment or delay in receipt of any benefit 
due from either Plan as a result of the errors. All benefits and 
expenses of each Plan were paid in a timely fashion by each respective 
Plan in the ordinary course of its business.
    10. In summary, the applicants represent that the subject 
transactions satisfy the criteria contained in section 408(a) of the 
Act because: (a) The Mistaken Contributions were inadvertent transfers 
that occurred solely through the errors of the Plans' independent third 
party administrator, ABPA; (b) the Pension Plan repaid the principal 
amount of the Mistaken Contributions to the Welfare Plan as soon as 
possible after the error was discovered and properly calculated by the 
Auditor; (c) the amount of interest to be paid to the Welfare Plan on 
the Mistaken Contributions has been determined by an independent bank 
(i.e., the Bank) as a fair market rate of interest to reimburse the 
Welfare Plan for losses relating to the period of time it was denied 
access to the assets erroneously allocated to the Pension Plan; and (d) 
no participant in either the Welfare Plan or the Pension Plan 
experienced any reduction, deferment or delay in receipt of any benefit 
due from the Plan as a result of the transactions.

    FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

William M. Hitchcock SERP (DB) (the Plan) Located in Houston, Texas

[Application No. D-10605]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to 
the proposed sale by the Plan of 67,466 shares of stock (the Stock) in 
Thoratec Laboratories, Inc. (Thoratec) to William M. Hitchcock (Mr. 
Hitchcock), a disqualified person with respect to the Plan, provided 
the following conditions are satisfied: (a) The sale is a one-time 
transaction for cash; (b) the Plan pays no sales commissions or other 
expenses in connection with the transaction; (c) the Plan receives the 
fair market value of the Stock, as determined by reference to its most 
current listed price on the National Association of Securities Dealers 
Automated Quotation National Market System (NASDAQ) at the time of the 
transaction; and (d) Mr. Hitchcock is the only Plan participant to be 
affected by the transaction, and he desires that the transaction be 
consummated.<SUP>10</SUP>
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    \10\ Since Mr. Hitchcock is the sole owner of the Plan sponsor 
and the only participant in the Plan, there is no jurisdiction under 
Title I of the Act pursuant to 29 CFR 2510.3-3(b). However, there is 
jurisdiction under Title II of the Act pursuant to section 4975 of 
the Code.
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Summary of Facts and Representations

    1. The Plan is a defined benefit self-employed retirement plan with 
one participant, Mr. Hitchcock, who is the sole owner of the Plan 
sponsor. The Plan sponsor is a sole proprietorship which is engaged in 
the business of consulting. Mr. Hitchcock is also the Plan's trustee. 
As of March 18, 1998, the Plan had $468,873 in total assets.
    2. On February 14, 1994, the Plan purchased 2,400 shares of the 
Stock at a price of $2.03 per share (i.e., for a total of $4,872). On 
April 5, 1995, the Plan purchased 200,000 shares of the Stock at a 
price of $1.30 per share (i.e., for a total of $260,000). On June 10, 
1996, the Stock underwent a reverse stock split of 1/3 and, as a 
result, the Plan currently holds 67,466 shares of the Stock. Mr. 
Hitchcock is a director of Thoratec, and together he and the Plan own 
1.8% of Thoratec.<SUP>11</SUP> The Stock currently constitutes 
approximately 93% of the Plan's assets.<SUP>12</SUP> The Stock is 
publicly traded on the NASDAQ.
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    \11\ In this proposed exemption, the Department is expressing no 
opinion as to whether the Plan's acquisitions of the Stock 
constituted a prohibited transaction under section 4975 of the Code, 
nor is the Department herein proposing relief for any prohibited 
transaction which may have occurred as a result of such acquisitions 
of the Stock by the Plan. However, the purchases and holding of the 
Stock by the Plan raise questions under section 4975(c)(1)(D) and 
(E) of the Code. Section 4975(c)(1)(D) and (E) of the Code prohibits 
the use by or for the benefit of a disqualified person of the assets 
of a plan and prohibits a fiduciary from dealing with the assets of 
a plan in his own interest or for his own account. Mr. Hitchcock, as 
a director of Thoratec, may have had an interest in the acquisitions 
and holding of the Stock which may have affected his best judgment 
as a fiduciary of the Plan. In such circumstances, the transactions 
may have violated section 4975(c)(1)(D) and (E) of the Code. See 
Advisory Opinion 90-20A (June 15, 1990). Accordingly, to the extent 
there were violations of section 4975(c)(1)(D) and (E) of the Code 
with respect to the purchases and holding of the Stock by the Plan, 
the Department is extending no relief for these transactions herein.
    \12\ The Department notes that the Internal Revenue Service has 
taken the view that if a plan is exposed to the risk of large losses 
because of the lack of diversification and the speculative nature of 
investments made by the Plan, such an investment strategy may raise 
questions in regard to the exclusive benefit rule under section 
401(a) of the Code. For example, see Rev. Rul. 73-532, 1973-2 C.B. 
128, which states, among other things, that the safeguards and 
diversity that a prudent investor would adhere to must be present in 
order for the ``exclusive-benefit-of-employees'' requirement to be 
met. However, the Department is expressing no opinion in this 
proposed exemption regarding whether violations of section 401(a) of 
the Code occurred as a result of the Plan's acquisition of 
investments that may be speculative in nature, such as the purchase 
of the Stock.

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[[Page 35291]]

    3. Mr. Hitchcock now proposes to purchase the Stock from the Plan 
for cash. No commissions or other expenses will be paid by the Plan in 
connection with the sale. The Plan will receive the fair market value 
of the Stock, as determined by its most current listed price on the 
NASDAQ at the time of the sale. On March 12, 1998, the Stock was 
trading at a price of $7.00 per share. Therefore, based upon this per 
share trading price, Mr. Hitchcock would have paid the Plan $472,262 
for the Stock (67,466 shares times $7.00 per share).
    4. Mr. Hitchcock represents that the proposed sale would be 
advantageous to the Plan because it would increase the Plan's liquidity 
and diversify the Plan's assets. In addition, 66,666 shares of the 
Stock owned by the Plan are unregistered and subject to certain sale 
restrictions under Rule 144 of the Securities and Exchange Commission 
(SEC). The restricted Stock can be disposed of only in a private 
placement or in the public market over a period of years under the 
timing and volume restrictions of SEC Rule 144. As a result, all of the 
Plan's shares of the Stock may not be sold on the open market at the 
present time. These shares of the Stock were purchased by the Plan in a 
private placement. However, in any sale of the Plan's shares to a third 
party in a private placement, the purchaser would probably demand a 
significant discount off the NASDAQ listed price in order to acquire 
the shares. Therefore, by selling all of the Stock to Mr. Hitchcock for 
the most current listed price for each share of the Stock on the 
NASDAQ, the Plan will receive a premium for its shares at the time of 
the transaction.
    5. In summary, the applicant represents that the proposed 
transaction satisfies the criteria of section 4975(c)(2) of the Code 
because: (a) The sale is a one-time transaction for cash; (b) no 
commissions or other expenses will be paid by the Plan in connection 
with the sale; (c) the Plan will receive the fair market value of the 
Stock, as determined by its most current listed price on the NASDAQ at 
the time of the sale; and (d) Mr. Hitchcock is the only Plan 
participant to be affected by the transaction, and he desires that the 
transaction be consummated.
Tax Consequences of the Transaction
    The Department of the Treasury has determined that if a transaction 
between a qualified employee benefit plan and its sponsoring employer 
(or affiliate thereof) results in the plan either paying less than or 
receiving more than fair market value, such excess may be considered to 
be a contribution by the sponsoring employer to the plan, and therefore 
must be examined under the applicable provisions of the Internal 
Revenue Code, including sections 401(a)(4), 404 and 415.
    Notice to Interested Persons: Since Mr. Hitchcock is the only Plan 
participant to be affected by the proposed transaction, the Department 
has determined that there is no need to distribute the notice of 
proposed exemption to interested persons. Comments and requests for a 
hearing are due within 30 days from the date of publication of this 
notice of proposed exemption in the Federal Register.
    For Further Information Contact: Gary H. Lefkowitz of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest of disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(b) of the act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete, and that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 23rd day of June 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 98-17135 Filed 6-26-98; 8:45 am]
BILLING CODE 4510-29-P